executive pay in the US Research Essay

The main objections and critiques of executive pay in the US and elsewhere stem from the belief that it is not only excessive but also seen as rewarding officials for their failures. For example, salary caps have been enacted for some executives in some public organizations where the CEOs are compensated with tax dollars. Executive pay ceilings have become less successful recently. Companies are currently coming up with innovative and novel ways to get around the change. Executive pay caps are laws and regulations that restrict how much compensation chief executive officers (CEOs) of businesses may receive. Executive pay caps should be enforced by

making the CEO’s salary a percentage of gross revenue, the percentage not exceeding 200 percent of an employee’s annual income, and a more improved reform. The present paper is an analysis of reasons why the compensation of executives should be capped as a way of ensuring that no excessive payment is made to the executives and avoiding rewarding failure especially with the use of the taxpayers’ money.

Framework for Imposing Executive Pay Caps

An executive salary should correlate with the financial status of the company. In most of the cases the CEOs’ pay is not correlated to the financial status the business but mainly pegged on the roles and duties of the top official. A business that is struggling to stay afloat and in serious financial crisis should not prioritize payment to the CEO but there should be a realistic situation in which the executive is paid based in commensurate with the company’s financial status as well as basing the payment on the availability of the financial assets.

If the company is successful, the leader of the business should retain a substantial amount as a reward for this achievement. There are various businesses that are consistently making profits and consistent growth in the value of the shareholder’s or owner’s wealth. The kind of businesses in which the leaders are constantly and successfully innovating to adapt into the various market dynamics should have compensation plans that reward the executives for their work. Profit-sharing plans is a practice common to most of the top world companies such as Google, Apple and others and is increasingly being adopted by smaller firms as a means of motivating and rewarding the business leaders.

On the other hand if the company does have a mediocre year, the CEO should be compensated based on this principle.Just like the business should be rewarded for the success of the business, he or she should take responsibility for the firm’s poor performance. Even though several factors contribute to a company’s dismal performance in any financial year, it can be observed that the CEO’s decisions and actions are essential in ensuring that the business does not plunge into losses. The business leader should be paid based on his or her ability to constantly assess the opportunities and threats as well as the strengths and weaknesses of the business so as to eliminate chances of making losses while enhancing productivity and profitability (Cebon et al. np).

According to Sloan (2016), under the initial deal, Apple should not have received any deductions following the guidelines provided by a 1993 tax law. Under the tax law, the company would have been prevented from considering Cook’s grant as an operating expense. In 2011, when Tim Cook was declared the CEO of the Apple Corporation, after Steve Jobs, he received approximately 400 million dollars in restricted stock. Despite the mixed feelings that would be expressed by shareholders regarding one decade of the grant’s term, Cook was determined to keep his job-in order to collect the stock. However, after two years, the terms of the grant were revised and modified by the Apple Corporation and Cook, dedicating 40% of the grant to “performance payment” basing the decision on the operations of Apple’s shares as compared to those of other companies within the Standard & Poor 5000-stock index. Cook was also quoted stating his desires to align the company’s shareholders’ interests with his own. However, the company omitted the fact that it had a chance to receive approximately 200 million dollars in tax deductions.

The 1993 reform passed by President Bill Clinton provided opportunities for major firms to establish legal loopholes. The Apple change is a perfect example of many corporations within the United States have managed to dodge the 1993 law which was aimed at restricting tax deduction on the salaries of top executives to one million dollars per executive per year, in an attempt to ensure the happiness and satisfaction of shareholders. According to the 1993 law, compensations received on the basis of performance are not subject to the restriction. Initially, the law only covered identified specific executives managing five firms with publicly traded stock.

While senior company executives should enjoy theconsiderable and reasonable amount of pay, their salaries must not exceed 200 percent of their total employees’ earnings. Within the past decades, the increase in the amount of salaries that are awarded to company Chief Executive Officers has reflected various developments in current market conditions that have been facilitated by improving microeconomics growth and increased rates of both profitability and productivity. For many companies, there have been significant improvements of revenues collected with appropriate adjustments of stock prices. It is evident that the contributions of individual CEOs cannot steer such great successes in production and profitability. However, the CEOs seem to be benefitting the most from it. This trend may prove detrimental to the growth and development of thecorporation, since the employees may feel neglected, under-compensated, and unappreciated especially on the firm’s success. For this reason, CEOs should receive reasonable pay and bonuses. However, these salaries and bonuses should notbe provided at the expense of the employees.

According to an analysis conducted by the Security and Exchange Commission, based on several firm filings, it was confirmed that within the last four years, more that 2billion dollars were paid to top executives within the US banking sector, being payment of performance bonuses (Anderson np). Through this analysis, it is evident that regardless of economic recovery that many countries are undergoing due to the Great Recession, some Americans are not entirely affected. Following the Great Recession, corporate profits and the stock market have returned to normal, with a worrying trend experienced in the labor market that has continued to remain stagnant. Many CEOs among other professionals who are at the top of the income distribution have seen asignificant rate of recovering with huge compensation increases of up to 54%, while typical employees still suffer from the negative impacts of the sluggish labor markets. Moreover, since 2009, employees within the private sector have had their salaries falling by 1.7%, regardless of the extra salaries that are paid to their CEOs.

Twenty-five years after passing of the executive capping law under the Clinton administration, there has been a substantial economic growth that has allowed the corporate bodies to maneuver the same law. The compensation that was capped at $1 million for top executives has changed over the years. The trend has shifted towards the pay per performance taking advantage of the loopholes in the capping law to ensure that the top executives remain the most lucrative positions in the corporate world.

But what’s driving the shift to pay for performance? taxes is one factor but not the only thing. Several other things have experienced transformations since the 90s; these include inflation, technology, levels of government debt and other factors. There is also a financial reform law of 2008 that among other things require that shareholders of public companies be given a nonbinding vote for deciding on executive pay packages at least once in a period of three years.

Revisiting the 1993 law, the companies have gotten the better of the loopholes in the legislation and have comfortably aware of how to find their way around the restrictions. For instance, the law stipulated that the capping will apply to only five named executives for every company with publicly traded stock who in some cases are not the highest paid. It also exempted the performance-based compensation that included huge bonuses.

Research shows that in 1992 before the passing of the capping law, only about 35 percent of executives were earning and income more than $1 million after deductions. In 2014, the year in which the research was done, the proportion of executives that took home $1million had hit 95% and still growing. From the noted inflation of executive compensation, it is not surprising to see a breach of the capping law. The numbers also give some interesting revelation that during the period between 1992 and 2014 executive compensation that shifted to the limited deductibility categories grew by about 650% compared to other categories such as incentive pay and stock options that are not subjected to deductible limits (Anderson np). The ideas behind the findings are that most agency models have shareholders or boards that favor the payment of executives based on the latter’s actions. This strategy would ensure the regulation of CEOs’ compensation through the formulation of a contract that would act as a directive.

Conclusion

In summary, this article discusses the significance of the executive pay caps to the economy. As discussed in the article, the executive pay caps would ensure an effective balancing of the economy. The idea of executive pay caps was to offer organizations with a tax incentive that would influence executive pay. However, reliable researches indicate that executive pay cap has had insignificant impact. As a matter of fact, major corporations in different industries within the United States have completely ignored the statute and proceeded to excessively compensate their top executives way past the set limit. The 1993 reform passed by President Clinton only managed to limit salaries of top company executives, with little success.

Works Cited

Anderson, Sarah. ”The failure of Bill Clinton’s CEO pay reform.” Politico. 31 August 2016.

Cebon, Peter and Hermalin, Benjamin.”The Benefits of Limits on Executive Pay”.Harvard Law School Forum on Corporate Governance and Financial Regulation. 26 March 2015.

Sloan, Alan. ”Remember That CEO Pay Cap? It’s Even Less Effective Than We Knew.”ProPublica. 4 March 2016.